Innovation at the Core Drives Innovation at the Edge (& Vice Versa)

Mobile broadband speeds (at the “core” of wireless networks) are about to skyrocket—and revolutionize what we can do on-the-go online (at the “edge”). Consider four recent stories:

Networks: MobileCrunchnotes that Verizon will begin offering 4G mobile broadband service (using Long Term Evolution or LTE) “in up to 60 markets by mid-2012″—at an estimated 5-12 Mbps down and 2-5 Mbps up, LTE would be faster than most wired broadband service.

Devices: Sprint plans to launch its first 4G phone (using WiMax, a competing standard to LTE) this summer.

Applications: Google has finally released Google Earth for the Nexus One smartphone on T-Mobile, the first to run Google’s Android 2.1 operating system.

Content: In November, Google announced that YouTube would begin offering high-definition 1080p video, including on mobile devices.

While the Nexus One may be the first Android phone with a processor powerful enough to crunch the visual awesomeness that is Google Earth, such applications will still chug along on even the best of today’s 3G wireless networks. But combine the ongoing increases in mobile device processing power made possible by Moore’s Law with similar innovation in broadband infrastructure, and everything changes: You can run hugely data-intensive apps that require real-time streaming, from driving directions with all the rich imagery of Google Earth to mobile videoconferencing to virtual world experiences that rival today’s desktop versions to streaming 1080p high-definition video (3.7+ Mbps) to… well, if I knew, I’d be in Silicon Valley launching a next-gen mobile start-up!

This interconnection of infrastructure, devices and applications should remind us that broadband isn’t just about “big dumb pipes”—especially in the mobile environment, where bandwidth is far more scarce (even in 4G) due to spectrum constraints. Network congestion can spoil even the best devices on the best networks. Just ask users in New York City, where AT&T has apparently just stopped selling the iPhone online in order to try to relieve AT&T’s over-taxed network under the staggering bandwidth demands of Williamsburg hipsters, Latter-Day Beatniks from the Village, Chelsea boys, and Upper West Side Charlotte Yorks all streaming an infinite plethora of YouTube videos and so on.

Unfortunately, the “neutralists” think that regulation, rather than innovation, is the better solution to dealing with the constant tension between the capacities of networks and the bandwidth demands of new applications. But as Adam Thierer noted in making the The 5-Part Case against Net Neutrality Regulation in his debate last week with Ben Scott of the radical “media reform” advocacy group “Free Press”:

Innovation at the core of networks is every bit as important as innovation at the edge: We don’t want stagnation at the core or networks, and the applications that ride on them, will suffer.

Funding the Future of Broadband

All this begs the critical question: What funds the networks of the future? What policies need to be in place to make sure they are delivered? If we believe Free Press and other pro-regulatory forces backing the FCC’s pending plan to impose Net neutrality regulation, freezing innovation at the core through “common carriage” regulation is the best way to ensure greater network innovation and investment. That’s essentially the argument they advanced in their filing to the FCC in the net neutrality proceeding (summarized here). Does that make any sense? When was the last time increased regulation of anything led to increased investment and innovation in this or any other sector?

Importantly, the sort of mandatory dumb pipe approach that Free Press and the FCC favor would limit potentially beneficial forms of network experimentation with new approaches to delivering bits in a more rapid, more reliable, or more secure fashion. Free Press apparently thinks speedy, reliable and secure networks just magically appear, like manna falling from heaven. But networks don’t get built thanks to divine intervention or magic tricks. Someone actually has to convince investors and shareholders to invest billions in risk capital on what are essentially high-tech crap-shoots.

Will massive investments in LTE or WiMax 4G wireless networks pay off as carriers compete with each to attract customers? That’s a very risky bet, since consumer wireless broadband service prices aren’t set by the cost of the networks but by what the market will bear: How much would you pay per month for a mobile data service capable of running applications that just aren’t feasible in today’s mobile environment? That probably depends on whether there’s a “killer app” to make the greater speed of 4G plans worth the premium over 3G. So, why would network operators try to strangle innovation at the applications layer (as Free Press fears)? Faster web browsing is great, but what will really make buying a 4G phone and service plan worth the price premium are innovative mobile applications like mobile Google Earth, Microsoft’s Photosynth, 3-D gaming, immersive virtual worlds, and so on.

Rolling the dice on multi-billion dollar next-generation networks becomes an even scarier proposition once regulatory risk is factored into the equation. Would you like to be the guy who has to convince your board, your employees, your shareholders, and the rest of the world that a multi-year, multi-billion investment in a commercially unproven technology is worth the risk when you have an FCC ready to wrap its tentacles around those networks and apply vague, open-ended regulatory notions like “Net neutrality” to them?

Consider recent innovations announced by Verizon and Google.

Verizon’s 10Gbps Super-Fast Fiber Demonstration

Verizon recently conducted a successful field-test of a passive optical network system known as XG-PON “that can transmit data at 10 Gbps) downstream and 2.4 Gbps upstream, four times as fast as the current top transmission speeds supporting the company’s all-fiber FiOS network.” Brian Whitton, executive director of access and video technologies at Verizon said, “This further validates our strategic choice of fiber-to-the-premises as the best way to build a future-proof network.” It certainly does—assuming you can recoup the initial cost of building and deploying that network. But regulation which treats such advanced networks as nothing more than dumb pipes would undercut such innovations by dampening the incentive to further invest and innovate in this fashion.

That’s not to say Verizon and other network operators will need to block traffic or betray “neutrality” principles as Free Press fears. Even today, Verizon has done what Free Press seems to think would never happen without regulation: Verizon recently announced it would begin allowing users to place Skype calls directly over the 3G network (which was previously only possible on Verizon phones over a Wi-Fi network). As the Los Angeles Timesexplained:

By embracing Skype, Verizon is betting that any revenue it might lose from customers downgrading their voice-calling plans will be more than made up by added sales of data plans and a share of the revenue from Skype subscriptions.

So Verizon gets a cut of the revenue—so what? How, exactly, is this obviously non-neutral deal bad for consumers?

Verizon’s Deal with HBO & TV Everywhere

The Los Angeles Times mentions another deal cut by Verizon that should illustrate just how important innovation is at the business model layer—i.e., in figuring out how to support the content and services taken for granted by users. In response to the accelerating shift of consumers towards “cutting the video cord” as Internet-delivered video has become a more clear alternative to traditional cable or satellite video service, HBO has cut a deal with Verizon to make its content available to FiOS subscribers just as it does with other cable operators.

Again, this is exactly the kind of partnership that may be needed to sustain content production in a world where the traditional cable model is breaking down quickly. Yet, for all their talk about the need for “new business models,” Free Press wants to ban this sort of innovation. When the cable industry has attempted to expand upon the model of its deal with HBO to give subscribers online access to a far wider range of video programming through “TV Everywhere” service, Free Press has accused the cable industry of “Colluding to Kill Online TV” and demanded immediate antitrust action and “structural rules like compulsory licenses.”

Google’s 1Gbps Fiber Pilot Project

While Verizon’s December announcement about 10-Gbps FiOS speeds drew relatively little attention, Google generated lots of excitement when it announced earlier this month that it would build a 1 Gbps fiber network to serve up to 500,000 customers. Google says it’s not entering the broadband business but considers this a “business model nudge and an innovation nudge.”[4] If it succeeds in raising the bar for broadband service and demonstrating what users could do with greater bandwidth, great!

But let’s not forget that the economic engine that drives Google (and will cross-subsidize this experiment) is advertising, which is under fierce attack. Verizon and other Internet Service Providers (ISPs), by contrast, have to rely on subscription revenues to not just to pay the costs of that infrastructure but also the risk premium associated with building out new, faster networks in advance of consumer demand. Unfortunately, all the recent hysteria about the use of “deep packet inspection” for behavioral advertising seems to have made it very unlikely that ISPs will be able to supplement subscription revenue with ad dollars any time soon. But that’s exactly the kind of business model innovation that could defray some of the costs of deploying 4G wireless or super-fast fiber networks.

Even with the cross-subsidy of advertising for this promising pilot project, Google’s high hopes may be wrecked again by the same kind of extortionary demands that have long faced cable operators (and, more recently, fiber competitors) when dealing with local governments. Google faced just such absurd demands with its municipal Wi-Fi scheme in San Francisco, ultimately helping to crater the deal.

A Framework for Promoting Openness, Investment & Innovation

Google and Verizon are, of course, just two of the many key players operating at the cutting edge—and convergence of—infrastructure, devices, applications and content technologies and business models. But the two companies seem to have found common ground in working together—perhaps through their high profile partnership to make Motorola’s Droid handset, which runs Google’s Android operating system, the flagship of Verizon’s smartphone offerings.

Most notably, the two companies managed to work through most, though not all, their differences on the deeply divisive issue of net neutrality to forge a common set of principles for how to address technical disputes about network management: through self-regulation, especially through expert technical bodies like IETF, “with governmental involvement limited to dealing with bad actors on a case-by-case basis where industry mechanisms are unable to resolve conduct that is anticompetitive and harms consumers.” These principles, presented to the FCC in January, provide a clear alternative to the kind of “prophylactic” regulatory regime of full-blown “line-sharing” or “forced-access” mandates contemplated by Free Press. These principles are also strongly reminiscent of the consensus proposal reached by a non-partisan group of 50 lawyers, economists, engineers and others PFF brought together in 2005-6 in the Digital Age Communications Act (DACA) project: Address actual harms through case-by-case adjudication ex post under the consumer welfare standard of antitrust law. Perhaps it’s time to dust off DACA as a “third way” on net neutrality.